Hunker down, conserve cash and slash budgets to the bone — that’s the overwhelming message from venture capital investors to startup founders as they fear the outbreak of this novel coronavirus will smother growth prospects.
With the chatter of a global recession gaining momentum, fundraising will be impossible for startups in the coming months, according to portfolio managers that Moneycontrol spoke to. As businesses struggle and financial markets take a pounding every day, even the most aggressive investors have turned cautious.
“There is a need to look at a 12-month runway,” said a top executive at an early-stage venture capital firm, referring to a term used for the period a startup remains solvent without additional funding.
“I am giving special attention to those portfolio companies which look like they are falling short, they need to make some financial adjustments to push it to a year,” the executive said, asking not to be named.
Another top executive at a fund who had run his own startup said the discussions now mirror the ones they had in 2008 after the sub-prime crisis hit US markets causing many of the large banks there to fail. “I had lost a term sheet then … a large number of my portfolio companies do not have the experience of dealing with something of this magnitude, they need to be repeatedly told so,” he said, requesting anonymity.
In this new year, few big deals have already happened, putting some of the players in a comfortable zone. Data sourced from Venture Intelligence shows Byju’s raised around $500 million, Swiggy did a $113 million round, Unacademy raised $110 million and Bounce raised $97 million. But for the rest, it could only get tougher. Since January close to $2 billion of private capital has come into the startup ecosystem.
The bleak growth forecast and nagging uncertainties about the damage of the virus have many investors and startups worried. Investors have asked startups to delay innovative product launches, pinch marketing spends and reduce the burn. And yes, prepare for a massive fall in revenues.
The focus is now on survival and growth can wait, according to a founder of a health care startup. “My investors have told me to not look at outdoing competition, conserve cash, continue investing in strengthening the technology platform,” he said. “When the winter (paralysis) is gone, the survivors will be the biggest beneficiaries.”
Such conversations are not restricted to early-stage companies. A partner with a large VC firm recently told his portfolio company, which is closing on a billion-dollar valuation that investors will also think twice before cutting those fat pay cheques. “Aim towards profitability or atleast reduce burn and extend the runway,” he told the founder.
Negative sentiments in the market have caused startups to go slow aggressive promotional activities. While nothing has been officially announced yet founders pointed out that cashbacks, deep discounting and aggressive pricing deals are already slowing down.
Companies that were in early-stage discussions to raise new rounds have now stepped back.
“We were exploring the market for a series B round, now our business has taken a 20 to 30% hit in terms of volumes and revenue, there is no way I am going to attract an investment at a good valuation, we are a cash flow positive venture and will try to delay the round to the end of this year,” said a founder of a Gurugram-based logistics startup.
Even the run-up to fund-raising has come to a grinding halt. While regular conversations can happen remotely, big decisions about massive investments need physical interactions. Global investors typically prefer to visit companies, meet the team, before offering the final term sheets. Those meetings have completely stopped.
Retaining talent is another key cause of anxiety. Instead of firing staff indiscriminately in these difficult times, companies are being advised to take a pay-cut across the board. Even bonus and variable pay can be held back, but firing is not advisable, they said.
“Ensure that critical talent is feeling secure and do not make rigid plans in a fluid situation,” said Ritesh Banglani, managing partner at Stellaris Venture Partners. “Companies that have a high fixed cost base will have a harder time if revenue falls off the cliff. Our advice is to move as much of the fixed cost to be variable because we don't know how deep this hole is.”